The cost of housing in the US has been rising faster than inflation since the 1960s. For an investor who either owns real estate, or has enough money to invest, this is good news. For someone needing housing, this is bad news, and is a significant, if not the primary factor driving homelessness. Two articles that discuss the connection between housing costs and homelessness:
There are numerous factors which have lead to the ever increasing cost of housing. In the US, the most fundamental issues is a 4-8 million homes shortfall1. There is more demand than supply. This will continue until there is more housing or less people. Fannie Mae’s The U.S. Housing Shortage from a Local Perspective noted that the contributing factors vary, e.g. there will not be a one size fixes all.
Another factor is the shifting of population. It has been noted that several cities have become “magnets” which attract people producing a combination of jobs and services which attract people to the city. In locations which limit geographical expansion, this produces significant upward pressure on the cost of housing. This is a problem not just in the US, but also in “desirable” cities across the world that employ a significant number of people and/or destinations known for a good quality of life, nice weather, etc. In some of these cities like Lisbon, real estate investors now own a significant portion of the housing which is often being offered up as short term housing.
Regulations (and Unintended Affects)
There have been many regulations created to encourage home ownership, safe housing, affordable housing, and that the elderly aren’t forced to move out of their homes as they age.
Homes are a Principal Investment Vehicle
US tax code encourages people to invest in real estate for good reason. Home ownership has become one of the most powerful tools for people to build familial wealth. For many people, their house is their major investment and their primary “retirement account”. They have a strong incentive to protect the value if their house. Anything that might reduce their homes values will be opposed.
As a result, home owners typically fight against new housing, especially high density housings. This is often referred to as not in my backyard (NIMBY). Adding housing potentially alters supply/demand. Second, the added housing might change the character of the neighborhood making it less desirable.
Improved Building Standards
Starting in the 1970s building codes were significantly strengthened and a tenant rights was put into law. The idea seemed good. Landlords should be required to insure their housing was safe and well maintained.
Unfortunately, a significant portion of the rentals could not be brought up to these standards in a cost effective manner, providing the profits the landlords sought. As the standards came in, these properties were often sold, improved, and then came back on to the market as upscale housing which was sold rather than rented. Often multi-tenant spaces were updated to provide more space for a smaller number of people. The result was that the supply of rental properties actually shrunk, driving prices up.
Rent Control
Rent control was intended to stop landlords from rapidly raising the rent on people, forcing them out of their homes.
While noble in intent, it has not necessarily accomplished what was desired. First, many people do not stay in the same home for long enough time to benefit from rent control. There is an incentive for people to stay in housing, even when it does not suit their current needs.
Rent control often reduces inventory because the return on the investment is capped by rent control. Landlords have incentives to take their rental units off the market and sell them. For a discussion about this, listen to the Freakanomics podcast Why Rent Control Doesn’t Work (Replay)
Single Family Zoning
Many areas are zoned R1, that it single family residence. This limits housing density and limits the number of housing units that can be built. In many locations, the land is actually more costly than the home. Limiting a significant amount of the land to single family homes significantly limits what can be built.
Tax Caps / Prop 13
California Prop 13 was “sold” as a way to insure the elderly wouldn’t be driven out of their homes by rising real estate taxes. Unfortunately, businesses more than elderly home owners benefitted from this. As a result, long time home owners and savvy business have been able to keep their real estate taxes low, but people who have purchased housing more recently carry a disproportionate tax burden.
Ineffective Low Cost High Density Housing
I have heard it said that single family housing is a luxury that society can’t afford. IN many countries the majority of the housing are apartment building. A quick way to produce significant amounts of housing would be to construct cost managed, high density housing. In much of Europe is a key part of why there is affordable housing.
In the USA, projects were attempted and largely failed. Rather than providing safe, affordable housing, the projects were often dangerous places that were not well maintained. They became “owned” by violent gangs which were so dangerous that the police would only enter in force.
Several low cost housing projects I am familiar with have been quite expensive to tax payers. While the rents or purchase price have been “affordable”, the cost of construct was quite high. Sub 400sq ft places than cost almost 500k, modest home that cost almost $800k to construct.
In the 1950s across communist nations many people were successfully housed by the building of ugly, but functional apartment buildings called Panelák. I am not sure why there is such a stark difference. Researching this might reveal keys to making this sort of housing to work well.
Failure to Improve Efficiency
The last 100 years has seen huge productivity improvements in most manufacturing fields. Housing was keeping up with these improvements until the 1950s when productivity stopped (maybe even regressing a bit) while other sectors continued to improve. As a result, housing costs increased relative to other costs.
Housing is still a mostly one off construction, done on site with skilled workers. This method of construction has not been able to benefit from scale, quality improvement, nor the worker simplification / specialization than has made other manufacturing processes more efficient and productive.
There have been several attempts to address this with factory produced (modular, prefab) homes. So far, this hasn’t produced the benefits that have been expected.
- Why Is It So Hard (and Expensive) to Build Anything in America?
- Why Modular Building Hasn’t Revolutionized Construction
- Affordable Housing | PD&R EDGE | HUD USER
- Opinion | Why Do We Build Houses in the Same Way That We Did 125 Years Ago?
- History of failed attempts to build houses cheaper
There are some promising prefab homes. One of the more encouraging from both a design and price standpoint was covered in a business insider article and homes made by the company VMD are promising.
What Could Be Done
Update Building Regulations
Create a two tier building code system. The first that enables building safe, economical housing for people seeking a modest existence. For example, many building regulations require new construct to have 200amp (or more) power. While this might be necessary for a luxury home filled with electrical devices, a very livable home could be constructed that uses much less power. A second tier of regulations would be available to insure homes met higher standards which are desired by “middle class” consumers.
Ironically, Most Americans want less regulation, until a building burns down and people die, then they ask the government, how could this happen, how could you allow this unsafe condition? There’s no upside to government employees in less regulation, only potential downside.
Cohousing / Tiny Houses
Cohousing attempts to build housing which supports and is informed by the community which will use the space. Cohousing creates common spaces to be used by the community which often reduces the amount of space needed by individual families. In recent years, cohousing has been combined with prefab “TinyHouses” to lower the cost and increase the speed to creating new housing.
There have been several non profit organizations which have been building sustainable cohousing communities specifically designed to address issues of homelessness. One great example of this are SquareOne Villages which are primarily in Eugene, OR and the Community First! Village described in the NYT piece Can a Big Village Full of Tiny Homes Ease Homelessness in Austin?
Permit RV
While no one is thrilled by it, RVs have become “affordable housing” in several high cost areas. Often the people using RVs struggle to find safe places to part their vehicles. Cities are increasingly forbidding RVs to be parked on residential streets, and typically bar people using an RV which are parked on private property. RV Parks are rarely found in urban areas, and are typically expensive.
Allowing people to use an RV parked on private property and having city provided areas that have affordable water, sewage, and power options could provide cost effective housing. I have been amazed to discover that while I am permitted to park an RV on my property, I am not permitted to let anyone stay in the RV. Portland is one of the few cities which seems to have a reasonable policy.
HomeShare
The Home Sharing Program in San Mateo County has been successfully running for 50 years. This program connect people who have extra space in their homes with people in the need of housing. The housing is provided for an affordable rent and/or services provided by the renter. I know several elderly whose are provided space in exchange for someone who can help them take care of the house, do grocery shopping, and occasionally provide transportation to doctors appointments. This program inspired HomeShare Oregon
Changing Tax / Loan Policies
Changing favorable tax treatment of property is not something that is likely to change anytime soon. People who have benefited from the favorable tax treatment of housing would fight against losing it. Furthermore, changing this quickly could have a devastating impact to people who financial planning was dependent on the current policies. If this was to. be changed, it would need to be done somewhat gradually, with some sort of grandfathering.
Another issue is 1031 which allows taxes to be differed if property is sold and then replaced with property of equal or larger value. This provides incentive for someone to grow their property footprint. The “new” property can be several properties. This encourages a consolidation of property into the hands of “successfully” property companies.
Finally, loans are readily available to people with sufficient assets and income to purchase real estate. This make it fairly strait forward for people of means to acquire multiple properties. The US could establish policies such as in Taiwan, which will not grant real estate loans to people who already own property.
